Campe Goodman on how impact bond investors can shift the world into a better trajectory
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Sustainable investing is growing fast and one of its newest tools – impact bonds – further increases the opportunities available to investors. By using impact bonds, debt investors can pursue returns while putting their money to work on solving the world’s biggest social and environmental challenges.
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In this Focus, Campe Goodman, portfolio manager at Wellington Management, discusses the key issues surrounding impact bonds including how capital can be steered towards the most beneficial projects. He also introduces the Wellington Global Impact Bond Fund, which has the goal of addressing some of the world’s most pressing challenges while seeking to provide strong financial returns.
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Important Information
THE INTERVIEW
Can bond investors help change the world?
Name xxxxxx xxxx xxxxx xxxxxxx
(4) It can be difficult to draw a firm conclusion about the green premium across markets and issuers. For some discussion, see Maria Jua Bachelet, Leonardo Becchetti and Stefano Manfredonia, ‘The Green Bonds Premium Puzzle’, February 2019; Suk Hyun, Donghyun Park and Shu Tian, ‘The Price of Greenness’, August 2018; The Climate Bonds Initiative, ‘Green Bond Pricing in the Primary Market’, May 2018.
Building common standards and ways to report KPIs is Challenge Number 1
Stan Verhoeven From 2007 to 2011, Stan worked at Kempen & Co as a quantitative analyst and (exotic) derivatives trader. He joined RBS in London in 2011 and moved to PGGM in 2012, where he was responsible for research into alternative risk premia. In 2015, he joined the Factor Investing team at NN Investment Partners, where he develops and manages a broad range of rule-based strategies, in addition to being Lead Portfolio Manager of MAFO. He is a CFA charterholder and holds an MSc in Business Administration from Radboud University, Nijmegen.
To explain his investment process, Goodman describes what happened after he first set out the fund’s criteria to Wellington’s broader credit teams. “I soon got an email from an analyst who had identified a really interesting high-yield issuer: a company in Brazil that provided clean water and better sanitation,” Goodman explains.
Identifying impact
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Impact bond investing is the segment of sustainable investing that channels debt market capital towards solving these challenges. The size of global debt markets means that impact bonds could be a huge lever for change, says Campe Goodman, who manages Wellington’s first impact bond fund.
Boston-based Goodman says that impact investing should address three categories of urgent global challenge:
• Life essentials, e.g., access to basic needs such as clean water and housing • Human empowerment, e.g., education, financial inclusion and bridging the ‘digital divide’ • Protection and improvement of the environment, e.g., through renewables and recycling
Planetary priorities
managed drinking water. (1)
he world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in developed economies. Some challenges threaten the planet, others threaten people – three out of ten people in the world lack safely
T
Mission to measure
Goodman thinks investors need KPI information to steer capital in the most beneficial direction. “If I were to put $100m in a particular investment, what impact would I get and how would I compare that to other investments?” he asks.
At the moment, issuer reporting varies in form and quality. “Building common standards and ways to report KPIs is Challenge Number 1 and could help the market grow,” Goodman says.
KPIs will also reassure investors. “The fear of greenwashing is a bigger challenge to impact investing than the limited scale of the greenwashing itself,” he says. Most greenwashing issues can be solved by thoughtful managers who look hard at what they are buying, including using KPIs. “So we will work with issuers to create KPIs,” he says, “but if no credible KPIs result, our fund will disinvest.”
The team checked the firm against the fund’s key criteria – impact theme, additionality and KPI measurability – and added the firm to the fund’s universe of possible investments. That’s the first hurdle for an issuer.
Then when Goodman began selecting high-yield issuers for his portfolio, he spotted the water firm’s “great risk/reward and investment characteristics”. So he double checked with the credit analyst and ran the idea past one of Wellington’s experienced emerging markets portfolio managers, before sizing and sourcing the investment.
Measurable Impact
But how can funds like Goodman’s prioritise and measure the impact of investments? And can bond investors help solve social and environmental problems without sacrificing returns?
Goodman, who has contributed to community services around Boston for more than 20 years, is particularly passionate about human empowerment. (2) But he argues that impact investing also demands rigour.
To be selected for Wellington’s new fund, an investment must address one of Goodman’s three impact categories and be ‘additional’ in that the impact can’t be easily achieved in other ways.
Critically, the bond’s impact on the world must be measurable through a quantitative key performance indicator (KPI), such as the amount of CO2 or methane emissions avoided, the percentage of charity care provided by hospitals, or the units of additional affordable housing constructed.
Everyone supports the drive for clean water, but some other impact areas are more controversial. “We’d like to help fund the transition of ‘dirty’ industries like metals and mining towards more environmentally-friendly practices because we think that could be incredibly impactful,” says Goodman. But his experience with energy utilities highlights a problem.
“A lot of utilities are issuing green bonds for their wind power,” he says, “but only some are actively shutting down thermal activities and moving towards wind and solar.” Impact investors must be selective. “We want to buy the bonds of firms making a real transition,” he says.
In other industries, he says, it can be even more of a challenge to try to make sure “we aren’t providing any capital to negative impact activities at all.” The answer may be future innovation in the form of ‘transition bonds’ structured to meet a high bar of transparency and sustainability goals. (3)
Creative controversy
Must fixed-income investors necessarily sacrifice returns in order to support impact bonds? No, says Goodman, citing two arguments:
He fears negative thinking might slow the flow of capital to critical projects. Goodman hopes to build a track record of strong returns and measured impact that changes the sceptics’ minds.
Sidestepping sacrifice
• All investors constrain themselves in some way. “We’re focusing on issuers providing services and goods such as alternative energy that will be in demand in the future,” he says. • Green bonds, and other bonds in Wellington’s impact universe, do not seem to trade at a substantial premium, in Goodman’s experience, though empirical evidence is mixed. (4)
However, Goodman is worried about one thing: “I’m amazed at the number of sceptics who still think impact funds will fail to make an impact and fail to make returns,” he says.
Building belief
(2) See Goodman’s biography in Fund Q&A for details of his recent community service work.
(1) See UN World Water Development Report 2019, Leaving No One Behind, p.18: http://bit.ly/2l7c4En
We want to buy the bonds of firms making a real transition
Campe Goodman, portfolio manager, Wellington Management
(3) For example, see discussion in Tom Freke, How ‘Transition Bonds’ Can Help Polluters Turn Green, Bloomberg Businessweek, 14 July 2019: https://bloom.bg/2lFwh4k
Wellington Management
Wellington Global Impact Bond Fund
Source: Wellington Management as at 30.06.2019. For illustrative purposes only.
Source: Wellington Management as at 30.06.2019.
FUND TYPE
11 (currently invested in 10)
IMPACT THEMES
Global Impact Bond
30 April 2019
INCEPTION DATE
Strategy launched in 2017
Bloomberg Barclays Global Aggregate, hedged to US Dollar Index
REFERENCE BENCHMARK
Government, agency, supranational, municipal, corporate and securitised
SECTORS / ISSUERS
Key facts
Impact themes invested in (market value %)
Our investment themes
Wellington has identified 11 areas of pressing social and environmental need, grouped under three categories, where we believe a real impact can be made. These themes are broadly aligned with the United Nations’ Sustainable Development Goals (SDGs).
Digital divide
Education and job training
Financial inclusion
Safety and security
HUMAN EMPOWERMENT
Human empowerment
Environment
Life essentials
Affordable housing
Clean water and sanitation
Health
Sustainable agriculture and nutrition
ENVIRONMENT
Alternative energy
Resource efficiency
Resource stewardship
LIFE ESSENTIALS
Data shown as of 2018. This work is illustrative of research carried out by Wellington Management. Developed on an issue by issue basis, leveraging, company/issue reports, publications and data-bases. The examples shown are presented for illustrative purposes only and are not to be viewed as representative of actual holdings. It should not be assumed that any client is invested in the (or similar) example, nor should it be assumed that an investment in the example has been or will be profitable. Actual holdings will vary for each client and there is no guarantee that a particular client’s account will hold the examples presented. Source: company/issue reports
Measuring impact in fixed income – illustrative examples
Campe works with a seven-strong team based in Boston and London. The team includes specialists in fixed income and ESG analysis, taking full advantage of Wellington’s wider resources, including expertise in investment grade credit, emerging markets debt and local agency debt.
Meet the Wellington Global Impact Bond Fund team
BOSTON
LONDON
Marc Piccuirro, CFA
Jennifer Rynne, CFA ESG analyst
Campe Goodman, CFA portfolio manager
Virginie Pelle
fixed income portfolio manager
fixed income credit analyst
investment specialist
Jake Otto, CFA
Meredith Joly
IMPACT
0.022% of annual global CO2 emissions avoided.
OUTCOME
7,434,091 metric tons of CO2 equivalent avoided.
OUTPUT
13,957,000 MWh of clean energy produced.
ACTIVITY
Allocate 81% of proceeds to wind and solar energy production projects and 19% to projects that improve efficiency in transportation.
ISSUER
European green bond
0.0031% of cost-burdened households provided with affordable housing at the national level.
Affordable housing stock increased by 0.45% on average by state.
644 affordable rental units constructed.
Mortgage loan issued to provide financing for construction of multi-family rental property.
Low-income multi-family rental property
CLICK TO VIEW THEMES
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Name xxxxxx xx xxxxxxx
Campe Goodman, CFA Senior Managing Director, Partner and Fixed Income Portfolio Manager Campe is a portfolio manager on Wellington’s Impact Team and Broad Markets Team. He has been managing multi-sector fixed income portfolios for nearly two decades. He is the lead manager on Impact Bond and Multi-Sector Credit portfolios, and he also leads a specialist team responsible for the development of sector rotation strategies. Outside the firm, Campe is a board member and former board chair of a Boston-based non-profit organisation that helps individuals, including many immigrants and refugees, to find employment and develop their careers. Prior to joining Wellington Management in 2000, Campe spent four years at the Massachusetts Institute of Technology studying macroeconomics and finance in a doctoral programme in economics. He received his AB in mathematics, magna cum laude, from Harvard College (1995). In addition, Campe holds the Chartered Financial Analyst designation.
What is the purpose of the Wellington Global Impact Bond Fund?
If people see strong returns, they’ll gain confidence they can meet both investment and impact objectives
In short, two objectives: strong financial returns and addressing some of the world’s social and environmental challenges through impact investments.
For us, those challenges fall into 11 themes, divided into three major groups. First, life essentials, which covers things like clean water and sanitation, health, affordable housing; second, human empowerment, which includes improving education, financial inclusion and bridging the digital divide; third, protection and improvement of the environment, which includes alternative energy, recycling and renewable resources, broadly speaking.
We developed these themes prior to the development of the UN SDGs (1) and have stuck with them because we think our themes capture what is investible. They’ve resonated with clients and we wanted to keep some consistency in what we’ve done. We’ve also mapped every issuer that we have in the portfolio to one or more of the specific sub-goals under one of the 17 UN SDGs – so there’s no problem showing clients how the portfolio aligns with the UN SDGs.
How do those themes relate to the well-known United Nations Sustainable Development Goals?
It’s a two-step process. We identify the issuers and create our universe of impact issuers – setting a high bar. Then from that universe, we construct the portfolio that we think is going to have the risk/return characteristics we are looking for.
How do you select investments for the fund?
Seven of us work on this approach, including two lead portfolio managers. I’m responsible for the overall direction of the portfolio and for every buy and sell decision. But we take full advantage of Wellington’s resources, including talking to almost all of the credit analysts and a number of specialist portfolio managers. So when we want to know what impact bonds are available to us in emerging markets, for example, we speak with our entire team of emerging market specialists.
How do you find the best impact investments?
One of the big problems in the UK and other developed countries is insufficient affordable housing. UK housing associations are a great way to address that so we’ve been buying bonds issued by some of them. Likewise, we invested in a quasi-governmental transportation authority in the UK that issued a green bond to make improvements to train capacity in a major urban centre, and to expand hybrid buses and create more cycle lanes.
Can you give examples of your impact investing in the UK?
One of the most straightforward is metric tons of CO2 and methane emissions that have been avoided. That’s generally a good KPI for clean energy. Other KPIs include units of affordable housing created or, for hospitals, dollars of charity care provided, or the number of people provided with clean water.
What key performance indicators (KPIs) do you use to measure impact?
I’d say there isn’t any skew in the universe of impact bonds that makes it either riskier or less risky than the whole universe of bonds. There’s a range of high-quality impact bonds available – including quality sovereigns and multi-nationals – that provide really great protection in a negative cycle environment. Then there are more risky investments that are great to have in an early or mid-cycle environment. So we feel we’re able to position the portfolio right now as defensively or as aggressively as we want to.
Is there any reason to think impact investing is risky this late in the economic cycle?
First, we’re seeing more issuers, and we’re also seeing more issuers figuring out how to package some of their activities as impact investments. So the supply of investment opportunities is growing, though I’d love to see it grow even faster.
How will impact bond investing evolve over the next 3-5 years?
Second, demand is growing. I’ve been doing fixed income investing for 20 years and, even five years ago, nobody was talking about impact bonds. Absolutely nobody. The growth of interest is amazing.
But because global needs are so great, the big challenge is to get even more investors coming into the space. Hopefully, if people see strong returns, they’ll gain confidence that they can meet both their investment and their impact objectives.
Third, standards and KPI measurement will evolve over time. We’ve got lots of good ideas but other people will have good ideas as well. We want to be sure our reporting is best in class. One thing that won’t change is our twin goal: generating strong investment returns and having a positive social and environmental impact.
Aligned with select UN Sustainable Development Goals
Wellington Management supports the UN SDGs. Our Fund is currently aligned with 13 of the 17 Sustainable Development Goals set by the UN
(1) See United Nations, 17 Goals to Transform Our World: https://www.un.org/sustainabledevelopment
